Good morning, everyone, and welcome to SPAR's results presentation for the six months ended 31 March 2023. My name is Mike Bosman, the Executive Chairman of SPAR, and together with Mark Godfrey, the CFO of SPAR, we will be presenting the results today. For our presentation, I'll begin with an overview and then deal with our operational and strategic update. Mark will then present the financial results for the period. After that, I'll give you a view on our outlook, and then we'll take any questions that you may have. The SPAR Group is one of the largest businesses within the SPAR International organization, and we at SPAR South Africa celebrated our 60th birthday this year. After SPAR Austria, South Africa is the second largest SPAR organization globally. We operate in nine countries: South Africa, Namibia, Botswana, Mozambique, Ireland, England, Switzerland, Poland, and Sri Lanka.
As you know, we're the second largest retailer in South Africa in terms of revenue. From an annual point of view, the group delivered over ZAR 135 billion in turnover last year, with ZAR 3.4 billion in operating profit. We have about 4,500 stores and over 10,300 employees in our nine countries. I was invited to join SPAR in mid-December 2022 as the new independent non-executive Chairman. At that time, there were serious allegations being made against SPAR in the press. I joined SPAR as a complete outsider to the group, and I spent the first months coming to grips with understanding the business and the key issues. The board then requested me to step in as the Executive Chairman at the beginning of February, following the retirement of Brett Botten, the former group CEO. It's been an intensely busy but exceptionally productive last few months.
I’d like to kick off by sharing some of my key observations coming into this business. In the first instance, we at SPAR recognize that our success is a company driven by the success of our independent retailers. Without them, we really don’t have a business. They underpin everything that we do, and they are the ones that are facing the consumers every day. They create the jobs and serve millions of people through the SPAR store network and help them build and improve homes through our Built It business. Our SPAR people operate in so many places, enriching their communities, and I’ve had the great pleasure of meeting many of our retailers during my short time at SPAR, and they have my greatest respect. One might think that SPAR is mostly in the business of delivering groceries and building supply materials, and that is true.
But perhaps more importantly, we need to recognize that we're in the relationships business. My view is that SPAR is a really great business and still has huge potential. The organization employs very good people. They're very competent and highly experienced. There's been a lot of change in the organization in the past few months. We recognize this must be very unsettling for our staff members and perhaps some retailers too. Change is never easy in any business, and I'd like to extend my sincere thanks to all of our staff members and retailers for the ongoing efforts for the business throughout this process. SPAR prides itself on the values of passion, entrepreneurship, and family values. However, there can never be a trade-off between governance and entrepreneurship. They're not opposing concepts nor enemies. The two can and must go hand in hand.
Entrepreneurship should not compromise the highest standards of corporate governance. The board takes this very seriously and takes a lot of comfort from the insurance services provided by the external auditors, PwC, and additional comfort will be sought from the newly appointed internal audit firm, EY. The SPAR voluntary trading model is a great model for grocery retail entrepreneurs because of its flexibility and the freedom it offers to retailers. While the model clearly works, there are many elements of it that we are revisiting and planning to improve on. We are challenging the thinking around how things are done and challenging the existing ways of doing things. Since our success is built on our retailer success, we also need to cleverly think about how we recruit our retailers and increase our support to them.
So this year of 2023 is a year for an urgent review of everything that we do in the SPAR business, and we're making significant progress. As previously mentioned, the group was facing serious allegations at the end of last year. And in terms of priorities, it was important to us that we dealt with these as a matter of great urgency. This included the composition of the board, which had come under severe criticism in the press during the period. I mentioned that I was appointed as Independent Non-Executive Chairman in December 2022, and I'm currently acting as the Executive Chairman until a new CEO takes up his or her office. Three directors have resigned or retired. We've appointed two new independent non-executive directors, Dr. Shirley Zinn and Pedro da Silva. And today we've announced that Shirley Zinn has been appointed Deputy Chairperson of the board.
We congratulate Shirley, and we wish her everything of the best in her new role. Last month, SPAR appointed Shauna Ashikoma as a new Company Secretary dedicated to supporting the board and committees and further elevating governance standards within the group. The former Company Secretary, Kevin O'Brien, has been appointed as SPAR's dedicated Group ESG Executive and will focus purely on environmental, social, and governance matters, driving SPAR's commitment to the future of our brand and the planet. In respect of the fictitious loan claims, the board took these allegations very seriously. We received different independent professional opinions, but at the end of the process, the board agreed with our auditors, PwC, that it was a reportable irregularity. This event happened in 2018, some five years ago, and the total amount was ZAR 11 million.
The reportable irregularity was reported to IRBA, and while the value of the loan might be regarded as immaterial, the transaction itself was unacceptable. Unethical behavior of any kind will not be tolerated at SPAR. In respect of discrimination towards retailers, it's very important to mention that all racial allegations and all allegations of SPAR acting in a racially discriminatory manner towards retailers were investigated by the independent third party, and it was found that there was no basis for any of these allegations. In respect of the two retailer groups with which we've had disputes, I'm happy to report that all 10 Black retailers who declared disputes with SPAR have had their matters amicably settled, and we are especially happy to have six of them back in this fold as SPAR retailers.
In respect of the Giannacopoulos matter, significant progress has been made through formal mediation processes, and alongside that, I believe our direct engagements with the family are assisting us to rebuild the broken relationship and hopefully resolving their and our issues soon. I believe that we're on top of the key issues that need addressing. The appointment of a new CEO is critical. We've worked urgently, but not in a rushed fashion, towards making an appointment. It's essential that we find the right person for the business. We have been through an extensive process of identifying possible candidates locally and internationally, and we're currently working with a very short list of candidates. We will continue to provide regular updates and hope to make an announcement soon.
Most importantly for us as a board, we derive a great deal of comfort from the fact that all three of our geographies have very competent CEOs in-country. The Polish business continues to make losses. Although these losses are lower than last, it is not making progress to break even quickly enough. We've been very busy reviewing our operations in Poland, and several of us on the board have visited the country a few times. It's particularly helpful to have Pedro da Silva on the board, with him having led a large retailer in Poland for 15 years. Late last week, the board received an extensive research document that we commissioned on the market, and the board is considering this research and the options. The board plans to make an announcement on Poland before the end of the financial year, and having said that, we recognize the urgency of this matter.
Poland has enormous potential with good economic growth rates, and according to some research, there are reportedly 80,000-88,000 independent retailers in the country, and the opportunities there could be enormous. The country has good growth rates, and while highly competitive, it is ideally suited to the SPAR model. In South Africa, our top-line growth is good, but it should have been better. We are maintaining consistent gross profit margins, which we're pleased about, but our costs are just too high. Management is focused on driving the costs down urgently, and we need to get back to positive operating leverage. I'll address our efforts to drive market share later in this presentation, and Mark will deal with South Africa's operating margin in more detail.
The SAP Go Live in KZN has been extremely challenging for us and has significantly impacted the result for the first half, and that is still hurting us and our retailers. We estimate that we've lost about ZAR 786 million worth of sales in H1, and we're addressing the issues as a matter of urgency and completely reviewing the remainder of our SAP rollout plans for our South African DCs and elsewhere. As far as the balance sheet is concerned, in difficult economic circumstances like this, we believe that cash protection is a key priority, and management is very aware of this. As a board, in the current situation that we find ourselves in, our country and in business, and with the idea of food security in mind, the business and the board have resolved to not declare an interim dividend.
Going forward, the board will adopt a far more stringent approach to allocating capital and dealing with investment opportunities. We've reviewed the capital structure of the business, and we are aware that there's some speculation in the marketplace about a possible rights issue. However, any form of equity raise is not something the board is considering, and we most certainly are not being pressurized into it. From a debt point of view, Mark will provide a detailed overview on the debt situation shortly, but it's really important to mention that with the exception of Poland, all of SPAR's foreign debt is currently being serviced and repaid from our operations offshore at low interest rates. Working capital is another important focus area. Obviously, the SAP issues in KZN are putting temporary pressure on our cash flow.
In respect of inventory levels, we've adopted a strategy to buy ahead of inflationary price increases and increase stock ahead of the SAP launch, and we're also holding safety stock, thereby protecting our customers, our retailers, and ourselves, and of course, our customers from the first date of our national infrastructure, including our ports, roads, railways, and the supply of electricity. We take our responsibility to supply our customers in all of our geographies, particularly with food and other suppliers, very seriously. It's an imperative that we carry extra stock to protect food supplies, I've mentioned. Having said that, every day of extra stock that we hold reduces our bank balance by ZAR 120 million in cash. Nevertheless, we will continue to be extremely disciplined in managing our inventory levels. The business is also reviewing the management of receivables and support offered to its retailers.
Going forward, we want to assist our retailers in any way, but we need to do this in the most efficient ways possible. Before moving on to a brief operational update, SPAR's ESG commitments can be summarized in our purpose statements as follows. Our environmental purpose is to inspire and influence stakeholders to make authentic and notable environmental contributions, and our socioeconomic purpose is to grow people and communities so that no one is left behind. This slide depicts some of the areas which our teams are focusing on. An enormous amount of work has been put into this, and there are many initiatives in place to support our vision of My SPAR, Our Tomorrow, our commitment to the future of the brand and our planet. The one area on the socioeconomic front that I'd like to highlight for the period specifically is the SPAR development program for suppliers.
This program was launched toward the end of the last financial year, and from a procurement point of view, we've developed this as a supplier-first solution, as in we're putting suppliers first and supporting small supplier entrepreneurs with their businesses. Once compliant from a food safety point of view, they can simply supply whomsoever they wish to supply and not just SPAR. This program has been specifically put together to ensure that micro and small supplier applicants have all the tools, knowledge, and access to industry specialists to help them grow their businesses and achieve their full potential in the most effective and affordable way, and during the period, over 300 suppliers in both the manufacturing and agricultural sectors around the country have registered for the program.
I'd like to extend a big shout-out to our Tessa Morris and the rest of our ESG food safety team with this great initiative, helping to create many jobs and supporting local communities and local growth in a very tough economy. The response has been incredible, and we're very proud of what we've achieved here. Turning to the operational and strategic update, this busy slide shows an overview of our markets and some insights on the business environments in which we operate, and I'm not planning to go through each of it. Across all markets, energy prices and food inflation have pushed costs higher, and the ongoing geopolitical tensions have resulted in continued uncertainty for commodity prices and global economic activity. In South Africa, like everyone else, we've been grappling with unprecedented levels of electricity load-shedding during the period.
Fortunately, 97% of our retailers have generators to run their stores during load-shedding hours, and we estimate this to cost our retailers more than ZAR 700 million in diesel to run these generators for their stores during the first half of the financial year. It's important to mention that the generators obviously need to operate and be on standby 24 hours a day to protect the fresh, chilled, and frozen portions of the business. The SPAR retailers have access to funding for generators, batteries, and other equipment through the SPAR Guild Development Fund and other SPAR arranged funding, and we use solar and generators at our own distribution centers. Looking at SPAR Southern Africa, the tables on the right provide a comparison between what we reported at a wholesale level versus what our retailers are reporting.
Wholesale growth in the current period has made a recovery against the prior period with strong retail growth and retail like-for-like sales. Retail growth ahead of wholesale growth speaks to the issues that we've been having with SAP and potential buying outside of the system by retailers in the interim. It also highlights the COVID-19 dynamics at play in the liquor base, growing at 40% plus in the prior year. The 2022 figures are inflated due to the restrictions being lifted in September 2021. Looking at SPAR's core grocery business, gross margin during the period was well managed, as I've mentioned. It's a solid gross margin performance considering an intensely competitive market and inflationary pressures in producer input costs as well as logistics.
SPAR launched SAP in KZN during the months of February and March 2023, as I've mentioned, and this has been a difficult time for us and the retailers in KZN, and we're doing our very best to provide support to the impacted retailers at this time. It's important also to say that we've assisted many retailers by distributing to them from our other distribution centers. Across all brands, including, excluding Build It, SPAR opened 57 stores during the period. A total of 105 SPAR and TOPS stores were upgraded, and considering the economic environment currently, it's a very encouraging situation to see retailers firmly committed to the SPAR brand and investing in new stores and upgrades. Operationally, Max Oliver, our Southern African CEO, and his executive team have made a huge amount of progress in respect of the six key focus areas as set out on this slide.
A new national marketing executive for SPAR, Tony Mun-Gavin, was appointed in January this year, and under his leadership, SPAR's marketing plan has undergone a complete overhaul. This includes a new marketing structure, the appointment of a strategic PR agency partner, and a new sponsorship strategy focused on building the strategy on three pillars: nutrition, education, and women's employment empowerment. Customer and format segmentation is how we are shifting to a more customer-centric approach to our business and provide our retailers with improved business intelligence and insights for making smarter and more informed decisions. During the period, our new customer-focused format architecture was approved based on a defined customer segmentation plan, which we will share in more detail with you later in the year.
One of the key focus areas for us has been the revival of SPAR's bakery and fish line range of products with SPAR Encore, which commenced last year. These categories have been well received by our retailers and consumers. SPAR's bakery category grew by 10.7% during the period, and home meal replacement offerings have been rebranded and were well received. SPAR to You, SPAR's on-demand shopping platform, was scaled to 234 sites at the end of the first half, up from five pilot stores a year ago, and the plan is to have 500 sites by the end of the financial year. There's this rapid progress considering the independent nature of our SPAR operating model, and so very well done to Blake Raubenheimer and his omnichannel team.
They also finalized the complete overhaul of the SPAR Rewards program, which was relaunched post-period end, and which registered more than a million consumers in six days. The number of customers on our new rewards program is now over three million. During the period, the Competition Commission approved the acquisition of the remaining stake in SPAR Encore with effect from the 1st of April 2023, and as a reminder, SPAR Encore is a provider of end-to-end supply chain solutions in private label products, and it manages the procurement, packaging, and distribution of house-branded products from independent manufacturers to our distribution centers. This exciting deal streamlines the structure of our private label business, and the teams have now been fully integrated into one SPAR Encore office. Retail excellence focus is about driving improved customer services and consistency across all SPAR stores.
The CX customer experience program was relaunched in September last year to incentivize retailers to improve customer experience within stores. The retail operations team launched a review of store operation, execution, and management processes to align them nationally. The amount of innovation and progress being made by the South African team is very encouraging, and we continue to also enjoy tremendous success in our businesses in Namibia, Botswana, and Mozambique. Under the South African banner, we also have our built business. build It is the number one building materials retailer in South Africa, and we have 403 stores, and this includes four new stores and 22 store upgrades in the period. The performance of this business is underpinned by the strength of its supply chain, a highly experienced group of retailers, and focus on retail execution, which is what continues to differentiate the Build It brand from the competition.
Customer relationships are key in supplying quality building products at the best possible prices. It is what keeps customers coming back to Build It. We're pleased to have appointed a new managing director for this business, Mark De Pyper, currently the national retail operations executive, and we congratulate him on this well-deserved appointment, and we wish the outgoing managing director, Rob Lister, all the best for the future and thank him for his incredible dedication to Build It for the past 23 years. Finally, just to touch on our efforts in the pharmaceutical space, our S-Buys and Pharmacy at SPAR businesses. The months of February and March were record months for both Scriptwise and Pharmacy at SPAR. Our pharmacy business is growing its retailer loyalty and added five new pharmacy stores during the period with 150 stores nationally. We continue to see good opportunity for independents in this area.
And with regards to , as a reminder, structure has three components. It's a wholesaler, catering to our pharmacy stores, and it's a courier pharmacy for highly specialized medicines. And it's also a training academy focused on the upliftment and upskilling of individuals in the pharmaceutical service area of South Africa. Turning to our European regions, Ireland and England. The BWG Group, led excellently by Leo Crawford, has continued to deliver very strong results despite significant macroeconomic challenges. We have a very strong presence in the Irish convenience food retail space with EuroSPAR, SPAR, Mace, XL, and the Londis brands. And all of these brands delivered positive growth during the period. A recovery in the hospitality and licensed trade sectors from March last year continued to boost performance during the period, and the group remains very well placed to optimize the opportunities in the sector.
The Irish team confirmed the strategy for the EuroSPAR format during the period, now competing in the supermarket sector, and Appleby Westwood in southwest England, where we have 346 stores, delivered a solid performance boosted by new store acquisitions, which helped offset the decline in volumes due to consumer inflationary pressures, causing consumers to trade down and reduce discretionary spend. In Switzerland, the Swiss market has continued to experience volume declines as consumers look to better value across the border. Shoppers tend to travel from Switzerland across the border into Germany and Austria, where they can buy goods for up to 60% lower prices. However, within Switzerland, the convenience sector still provides many opportunities. Our TopCC cash and carry business has been impacted by a contraction in the gastronomy sector, coupled with consumers eating out less.
Towards the end of the period, we launched two GO24 concept stores, as shown on the slide. These stores are completely unmanned and are open to consumers 24 hours a day, seven days a week, 365 days of the year. The software has performed exceptionally well, and management are confident that in time we can utilize this platform to extend shopping hours in selected EuroSPAR stores and neighborhood SPAR stores. It's early days. However, this does provide a great opportunity within this market, especially in respect of access to Sunday trading hours, where many stores are closed in Switzerland. We're also trialing our SPAR to You on-demand shopping app, thereby expanding our consumer reach to an improved omnichannel offering in this country.
Moving on to Poland, as I've mentioned earlier, we're working very hard on our options for the Polish market and will announce our plans shortly, as I mentioned, and in terms of progress made during the period, gross margins increased due to the improvement in supply terms, but also due to improved gross margin at retail. Retailer loyalty for the country reached 60% for March 2023, having been at 48% at the end of 2022. In terms of the store network expansion, 17 new stores were opened during the period, and 10 non-viable stores were closed. The restructuring of our DCs in Poland is complete, and the extended range offering for retailers in the south was launched in January 2023. In Sri Lanka, we have a joint venture arrangement with the highly experienced local company Ceylon Biscuits Limited, a leading local biscuit and food manufacturer and exporter in Sri Lanka.
Established in the 1960s, Ceylon Biscuits has strong roots in local communities and is committed to enhancing food retailing and entrepreneurial opportunities in the market, making it an absolutely ideal partner for SPAR. While this market presents potentially great opportunity for SPAR in recent years, the political and economic crisis has been a massive setback here. Having said that, there are signs that this is now turning around completely. The business, for the first time, delivered a small operating profit in 2022. With a population of more than 22 million people, mostly young and a predominantly informal retail environment for food, this market offers huge potential and is perfectly suited to the SPAR model, and so we'll be investigating opportunities there. I'll now hand over to Mark to take us through the numbers.
Thank you, Mike. Good morning, ladies and gentlemen.
As much as we operate in multiple currencies, I've just had it also pointed out to me, we need to start considering multiple time zones. Our Irish team are still having breakfast, so to Leo and the team, enjoy the coffee, and we'll take cognizance of our 9:30 A.M. start when we consider future presentations. As Mark said, I will attempt to present the numbers now to really fill in the color of what you've already received. If we look at our salient features for the period, turnover just under ZAR 73 billion, ZAR 72.9 billion, growing at 7.9%, and we'll unpack that by geography. The margins have maintained what appears to be an uptick of roughly 20 basis points, but in fact, if you strip out the decimals, it's largely in line with the previous year.
Unfortunately, I'm going to once again frustrate some of you and say it's a lot to do with mix. We are not profiteering. We have seen strong growth in some of our higher earning regions, and as Mark has already alluded to, some of our corporate retail businesses are performing well. However, there is a significant gap on the slide. If you move from a solid operating growth performance or gross profit performance to an operating profit that declined by 17.5%, and fundamentally, our operating costs were the issue. Those grew by 14.7% across all geographies during the period and have to be a significant focus for us. We were well aware of the fact that rising inflation in Europe and in South Africa was going to impact costs, but to the extent that we were able to hold that is obviously the issue.
Operating margins have declined from 2.7%-2.1%, and that is the focus for the business going forward to drive those up, particularly in our Swiss and South African geographies. Profit after tax continued to decline, as finance costs and interest obviously had affected all of our geographies. And from there on, earnings per share, headline earnings, and diluted headline earnings roughly tracking at that trend to finish minus 30% down. As has been described already, the board's decision to, at this stage, declare no dividend, I'm sure will come as a disappointment to a lot of shareholders, but I think it is also only appropriate to recognize in these uncertain times that we maximize cash holdings and particularly deal with the balance sheet stresses, which have caused the concerns around group debt.
Net asset value increased by 27.5%, and ironically, underpinning that is the exchange rate because of the significant investment that the group has in European assets, and the hedge consequence of that is driving that performance. If we can turn to the similar slide, but just presenting it to you from a regional perspective to give you a sense of how the various geographies have performed, I'm not going to go through each of the countries. The information is there, other than to say that our European business or our international business now constitutes some 35.4% of total revenue. Unfortunately, the profit contribution from those regions is not as strong. That's just under 25, significantly impacted by the Polish business that remained loss-making, but we need to recognize that that loss has actually improved by some 37% in this period.
So looking at it across all geographies, it'll give you a sense of the gross margins. And as I've mentioned earlier, largely the impact of mix, the Irish business having a strong exposure to corporate retail and the Swiss business similarly affected. Operating expenses, again, are set out for you to get a sense of how the cost structures of our various businesses are set out. And then at an operating profit margin, again, giving you a sense. The South African business, fundamentally for us, is the issue. That business has historically traded at margins of circa 3%. It is substantially down on where we target it to be. And in the short term, the challenge will be to drive that 2.2% back towards 2.7% and 2.8%, and then finally get it back to levels that we would expect to see it.
The Irish business in recent years enjoyed significant benefits coming through the COVID period and saw that margin up at nearly 3%. But I believe Leo and the team would acknowledge that at 2.6%, they would be comfortable, and that is in line with the previously guided margins that we believe the Irish business would return. And the Swiss business, to a lot of you, I'm sure, would look like an extremely disappointing performance, again, having returned margins of well over 2.5% during the COVID period. But the business at 1.5% margin is, again, very much in line with our previous guidance based on the mix and the segmental structure of that business. We do believe there's opportunities for the Swiss business to improve, getting closer towards the 2%, but not too far off the consistency that has shown in the years pre-COVID.
Net finance costs, again, just to highlight those per geography. And as guided, obviously, with rising interest costs across all regions, those have been significant. But again, just to point out that the fact that debt is structured, and I will cover debt in some detail on slides to follow, the fact that our debt is largely based in Europe, where it's linked to Euribor and SARON rates of anything up to zero. Obviously, those have moved in recent years, but the margins that we enjoy in Europe are significantly lower than those in South Africa, and hence the decision to leave the debt and to structure the debt in Europe because of the financing benefit that it's presented to the group.
Just to make the point and to echo the comment that is made, yes, the SAP implementation in the KZNDC adversely affected turnover, a decline or a notional loss of turnover of roughly ZAR 780 million estimated, but that did have a significant operating profit effect. And again, part of the contribution to the overall South African performance would have been that we are very confident that that will very rapidly normalize as the KZN business internalizes its conversion to SAP, and we start seeing that system settle back to the performance that we enjoyed pre the implementation.
And then along the bottom, the last line of profit after tax, just again to give you a sense of the profitability, and just again to highlight that in the H1 period of 2022, the Polish business reported a loss of some PLN 184 million, and hence a fairly significant and noteworthy improvement despite very challenging conditions in that region as well. If you could turn the slides and just to unpack some of the turnover, and again, a lot of information, a lot of geographies, and a lot of very dynamic changes that continue to take place. The South African business's core groceries improved by 7.9%, a solid number and a number that we take a lot of encouragement from because it was an area of the South African business that had underperformed in significant years. For H1 2022, that exact row was a mere 5.3%.
Yes, there are inflationary benefits that have impacted that number, but we still believe that we are making positive inroads in recovering some of the lost positioning that SPAR's wholesale business was enjoying. Mark's alluded to this significant liquor impact of a year ago, where we saw a surge of liquor sales just following the pandemic, the threat that lockdowns might again be re-implemented or possibly some people coming out of lockdown heading to their local TOPS store. In H1 of 2022, that number was 42.6%. So the 1.9, albeit looking at face value very disappointing, needs to be seen against the context of an extremely inflated base. In fact, if you look at the number of 2023 versus 2021, and again, I'm not trying to do a pre-COVID exercise, liquor over the last two years has grown by some 39%.
So there is still a very strong underlying growth in our liquor performance. And then, as has already been touched on, our Build It performance declining by 3.8%, I think needs to be seen in the context of an entire sector that is in slowdown at the moment. And without trying to suggest otherwise, I think our Build It team would still make the point that that number, albeit negative, is probably a lot stronger than some of our opposition's reporting. So the South African business growing by 5.4% because of the implied negatives on two of those significant categories. S Buys, an incredible performance, plus 20%, some very strong growth coming out of their strip drives, but also their pharmacy and SPAR business, and to the whole team, congratulations.
And then Encore, which, as most of you will appreciate, is our private label sourcing business, and that number is very misleading because effectively that represents just the external business that Encore do because effectively some 95%-98% of their business is supplying the SPAR grocery business, so effectively a vertically engineered business, and that number should not be seen as the performance of Encore and the team. The Irish business, an exceptional performance in euro terms, plus 8.8%, and the business is clearly enjoying very strong momentum at the moment. Across all of the retail channels, all of the retail symbols, there's been strong performance growth.
The recovery of the hospitality sector contributes a significant part of that business, and that has also aided, but also the impact recently of some small acquisitions, both corporate retail and in the Irish business, BWG Group, some of the small cash and carry businesses, all accumulating into a very strong performance coming through in that number. The Swiss business, in ZAR terms, growing by 6.9%. Again, perhaps some disappointment might be seen in the -4.3%, but I think we need to see it in the context of the entire Swiss market, which is in decline at the moment. Inflation in Switzerland has reached record levels of 3%, and in local markets, a number which is really completely unheard of.
So clearly, there has been some concern around inflationary pressures, and again, we're starting to see this phenomenon of cross-border shopping or exodusing to go and buy your groceries in neighboring countries becoming an issue. We believe that we would retain or hold on to a lot more of the business post the pandemic, and I think against the rising inflation in the country, that has continued to be a challenge, but a solid number for the business in ZAR terms. In Poland, as has been alluded to, growth of 4.9% needs to be seen against the backdrop of a year ago losing some 58 contracted retailers we elected not to stay with us. So we have made strong inroads into loyalty growth.
I believe our new business is perhaps not as strong as what we would have expected to have seen at this stage, but the Polish business showing encouraging signs of improvement. If we would turn the slides, just to guide around some of the indicative inflation and really not to focus too much on inflation, I think what we'd just like to give you a sense of on this slide is how all of our geographies have seen substantial inflation coming through in food, alcohol, and tobacco. In South Africa, the official numbers are in the region of 14%, and you can see the extent of that increase of the same period a year ago, more than doubling, and just on the right-hand side, to give you a sense of our own wholesale inflation, substantially down at a grocery line against the official line.
Again, I think talking to the extent of the support from a pricing perspective that we continue to give both our retail customers and, in turn, the population that they serve as their greater customer base. Pricing is obviously extremely sensitive in the market at the moment, and SPAR need to ensure that they remain price competitive. In Ireland, an incredible increase, and in fact, very much indicative of what's going on in Europe, almost 10 percentage points in food and non-alcoholic beverages. In Switzerland, again, off a zero base, and that's not a typo. The Swiss business seeing increases of more than 6%, and even in Poland, that number in strong double digits. All of this has impacted volumes across all of our regions, but despite that, we're still converting some strong revenue performance.
If we could turn the slide just to moving to the gross margin category, and again, just to make the point that a lot of the increases and, in fact, some of the movement that we've seen has really got to do with mix. There's very little profiteering, and I use the word cautiously, in any of our geographies at a very sensitive time. The 10 basis points in South Africa is largely the change in the core business as liquor and building materials traded lower margins, so obviously that impact ironically results in an increase in the percentage. In Ireland, a very strong 80 basis point increase, and again, seeing the increase in consumer spend around product mix, convenience products, confectionery sales, all coming through strongly in their performance. Switzerland, the 110 basis points decline, again, having to do with mix.
We sold into private hands during the period, some 25 of the corporate retail stores, obviously losing that additional margin, but at the same time, also stripping out the costs relating to those stores, and then, as a result of the decline in volumes in Switzerland, a big ticket item would have been the supplier rebates that would have been earned on the total volume business done. Poland have seen an encouraging increase of nearly 200 basis points, but again, speaking to improved supplier terms, some very good work being done by the marketing teams in Poland in supplier negotiations, but also in the performance of retail. And Mark has already alluded to the fact that retail margins in Poland are up nearly 150 basis points in the period, so an increase of some 20 basis points, but very strong contributions from the high margin categories of the business.
If we could turn to operating expenses, and I guess we could spend a lot of time discussing OpEx because effectively the big ticket item, but I'm going to try and summarize them firstly by geography and then just some of the major categories. The South African business showing some 16.8% increase in operating expenditure in the period. Just some of the major line items affecting that are employment costs, up roughly 9%, and that obviously included not just the volumes, but also new heads that have been introduced into the business to support the innovations. And again, not just speaking to the SAP implementation, but innovations across the entire marketing sphere that we are moving into.
Our IT costs covering some of those, increasing by some 51%, and a lot of the work being done in that space, the development of SPAR to You, networking costs, software licenses in advance of supporting SAP, and a move of our entire operating platform into the cloud. For those of you that, like me, get a little nervous when you get told your entire storage repository is in the cloud, well, I'm assured that it's very secure, but obviously it comes at a cost because of the enjoyed benefit of the security around protecting our data. And then the SAP Go Live, also part of that. Fuel and distribution costs, up 27%. I think we're all very familiar with what's happening in the price of both diesel and petrol over the period, and significant impacts there.
The opportunities or the challenges for us are to ensure that we are maximizing our distribution networks from an efficiency point of view because there's very little we can do around the base cost of fuel. We just need to be working as smartly as I know that our logistics teams are doing in all the geographies, and marketing costs, up 19%. A lot of work being done, not just around the new rewards programs and driving a lot of innovation at retail, but obviously spending time to remain competitive in the market as well. S Buys up 22%, again, very much related to volume, but also to drive the efficiencies that are existing in those businesses, impacted likewise by inflationary pressures.
If I move to the European businesses in Ireland, up 22%, very much in line with what was budgeted, but underpinned by significantly rising fuel and energy costs in Europe, and again, the challenges of labor, which we've spoken to, not just because of increased labor costs, but also understanding that volumes in that business have increased, and obviously the variable element of labor costs would follow suit. In Switzerland, rather smaller increase in ZAR terms, but in Swiss currency, an actual decline or a decrease of some 3.5%. And as I've alluded to on a previous slide, the disposal of those 25 corporate stores obviously would have had the related costs stripped out of the business as well.
And ongoingly, the Swiss team are looking at every opportunity to drive further costs out of the business going forward as the top line is now stabilizing back at the kind of levels pre-COVID that we believed we could grow from. And then in Poland, a decline both in ZAR and in Zloty terms, despite the pressures like European neighbors in fuel, energy, but the benefit that they enjoyed was somewhat, or rather the costs that they experienced, somewhat offset by some foreign exchange gains that was made as a result of currency movements between the Zloty and the euro. So the total group increase of some 14.7%, and as Mark has already alluded to in his opening remark, something we simply cannot continue to absorb when the top line is so much lower than that.
We simply have to push on all of the cost lines to ensure that we are leveraging the operating margin. If we could turn to the finance costs, and again, not to spend a line item focus on this, but just to give you a sense of at an income level, there has been a slight increase in our income earnings. We obviously don't have a lot of cash or cash in instruments, so really not much significant impact on income categories other than obviously the components of IFRS. Bear in mind that we have sub-lease arrangements, hence the income from IFRS leasing, and that is somewhat offset by the related cost.
But I think you can see if you look under the finance cost component of the analysis, the significant increase in both loans, and strangely enough, the bank overdrafts in an area that I would like to touch on when we talk about the group debt. So across all of the geographies, the sharp increase in financing cost over the period impacting cost and obviously flowing through to impact net profit as well. But just as a sense, and for those of you that perhaps don't have much exposure to the European markets, the Euribor alone over the period of October to March of this reporting period moved from 0.7% to some 2.9%. So that's your base cost, a significant increase. Fortunately, we've negotiated very, very competitive margins, but the Euribor underpin is obviously impacting that significantly.
In years previously, that number had a floor of almost zero. Again, getting a sense of that increase. We've broken it down below just by segment so that you can, again, get a sense of the costs for our various geographies. If we move on, and really the next couple of graphics is just to visually demonstrate what is happening in currency. I know a lot of you are tracking currency performances with SPAR, but as you can see, just on a spot rate impact, the graph on the right-hand side is quite literally the last six months. Simply the movement between where the spot was or the closing rate was at March 2022 versus where we find ourselves now, a 19% weakening of the rand.
And obviously, that impacts both the valuation of the foreign balance sheets, but also exposes us to the risk that the debt in those foreign currencies does look extensive when consolidated at a group level. Unfortunately, by comparison, the average rate, which is used to translate your income statement, only grew by some 6% over the period. So unfortunately, again, showing further disconnect. And if you turn the slide, we do a similar exercise for you on Poland. The Polish closing rate, the Zloty versus the rand, March 2022 versus March 2023, some 19%, and again, significantly impacting the consolidation of the Polish business. The slides that follow, if you would turn, is really just, again, a visual representation of what we've just touched on in the actual numbers. So not to spend too much detail on it, the turnover disclosures have been provided previously.
The South African turnover growth of 5.6% in ZAR terms is a solid 15%, Swiss just under 7%, and Poland at 9%. And then on the right-hand side, the contributions to operating profit versus their base of a year ago. And in fact, I think it would only be appropriate to call out the Irish team that managed to actually increase profits despite the challenges that they faced. So to Leo and the team, a solid set of numbers. And again, illustrated on the slide that follows, if you would just turn the slides, we do a similar exercise just to highlight the local currency, to try and remove the foreign currency vagaries and just to illustrate how the various performances of the geographies look in their own reporting currencies.
If you would turn the slide, I think let's get to, I'm sure, an aspect of the business, and it hasn't intentionally been left for last, and that's really the balance sheet. What we've presented, again, on a fairly extensive slide is just the regional balance sheet highlighting some of the key components or key elements of the various geographies. So just starting in the South African column, just under ZAR 3 billion worth of solid assets in property, plants, and equipment. Obviously, having to recognize the finance IFRS component of leases, so the non-current component of that ZAR 4 billion, and you would look down below to the red box, a roughly matched ZAR 4.8 billion, which again demonstrates the head lease sub-lease arrangement that South Africa has historically entered into on a lot of property leases.
In the South African business, current assets and current liabilities, roughly 17.5-17.7, and the South African business having almost no term debt at all. There's a small mortgage on an adjacent property of some ZAR 120 million. If you move to the right, obviously, and particularly just stay in the red box at the bottom, you start getting a sense of the long-term borrowings in ZAR terms in Ireland, just over ZAR 3 billion. In Switzerland, a similar number, ZAR 3 billion, and more recently, the Polish business contributing roughly ZAR 1.3 billion. To give you the long-term component of our borrowings of ZAR 7.5 billion, I'm going to unpack this on the slide to follow, but just to get a sense of where those borrowings are situated, but moving back to Ireland, a significant part of the Irish business is obviously their goodwill and intangibles.
The business has grown over many years via acquisitions, and that goodwill number represents a very strong historical base of growth that the team have enjoyed and are very competent at doing, and that is valued and assessed for impairment every year, and the headroom in that number is excessive, so again, a very strong indication of the performance of that business. In Switzerland, right-of-use assets, all of the property, particularly the TopCC cash and carries under lease, and similar valuation on current assets and current liabilities. In Poland, a lot smaller valuations because of the recent entry into that market, but again, just to note the non-current liabilities at circa ZAR 2 billion, of which the lease liabilities on properties are some ZAR 750 million. And then the group numbers obviously casting to the right.
But moving off that base, if we could turn the slide, I think let's get into what is a concern or has, at least in certain notes, been a concern to the market. And we're just trying to address group debt and just to try and give a sense of the debt that is used both in the disclosure, but also in the measurement of the relationships with our banks. So if we look at the top part of the graph, what we've exhibited here for you is the bank overdrafts, which are a significant part of the total debt measure, particularly in discussions with bankers and in banking facilities. And as you can see over the course of the last three reporting periods, that number has definitely moved from a year ago, ZAR 3.5 billion.
We probably got the sequence somewhat out of line, the full year FY 2022 slight decline to ZAR 3 billion, and then a fairly significant increase to ZAR 4.9 billion as at the end of the reporting period, March 2023. You will see that the total borrowings of the business have remained relatively flat, commencing in 2022 at ZAR 6.7 billion, moving to where we are now reporting ZAR 8.5 billion. The difference between that number and that we've just touched on on the previous slide is the current element, so that is total borrowings, ZAR 7.5 billion for just over a billion. We will again discuss that further. Then there was a very small recognized financial liability bank balances, roughly maintained across all of the geographies at ZAR 0.75 billion.
But the point I really want to then make is if you consider the total group debt at the end of March 2023 of ZAR 12.7 billion, which appears to have increased rather dramatically from the ZAR 9.8 billion reported six months ago, a significant part, nearly ZAR 2 billion worth of that is in short-term bank facility movements. And the concern that has been raised around debt is well noted. We are well aware and focus on our debt quite substantially. But the point I would just really like to make now is the controllable element of that in the bank overdraft element is something that is critical for us to focus on right now. I'll talk to that again on further slides to follow, but just setting up below that, again, we do a similar exercise to setting up the debt exposure in local currency.
As you can see, if you look at Ireland, that number has moved from roughly 183 to 199. There have been paydowns against that, and included in that number is part of the Irish revolving credit, which is really just a short-term funding facility. So that's not just all term debt. Switzerland, again, showing a slight increase, but also underpinned by paydowns and the Polish number in euros showing some small decline.
But really what we want to demonstrate in this exercise, and I suppose it would be best if we simply move to the slide to follow, is that yes, the concern that has also been raised in the market around the potential impact of a bank covenant breach. I think the overarching observation and the statement that needs to be made is the confirmation that at the 31st of March, the group at a parent level breached its covenants with the banks. And I would just like to unpack to some extent the relationships that we do have with our banks. In each of the European geographies, we maintain local banking relationships and in some cases syndicated relationships. And in most of those instances, we would have local covenants measured against local performance. And that is the primary area of concern for those local bankers.
The parental guarantee, which overlays that almost at an umbrella level, considers the entire group. Obviously, when you have certain regions like Poland and more recently like the performance in South Africa rolling up into the group level, that can create at a group level some distress where regional bankers do not recognize that, albeit that they recognize the issue or they recognize with some concern the fact that at a parental level there's some distress. Their primary focus is on the local relationship. Obviously, in Ireland and in Switzerland, those have been well received by the bankers, and we were able to very, very easily and very quickly negotiate and present to the banks the situation and receive their full support and their waivers. As you can appreciate, in the Polish business, because of its performance, the situation does change. Yes, the bankers are cautious.
Yes, they were concerned, but again, very supportive and were prepared to provide us with waivers on that breach that did take place at a parental level. The calculation that we've done is really for a lot of you to understand that our banking covenants are actually reported in a pre-IFRS format. So fundamentally, we actually have to go and restate the disclosure. And part and parcel of that is just adjusting the operating profit back to a pre-IFRS effect. We've tried to just give some guidance on the components. But if we just start firstly at the net debt level, I think it is also important to highlight, and I'm fully respectful of the fact that in dealing with any covenant measure, particularly if your debt is in foreign currencies, the defense of FX movements is a weak one.
I think it is just important to realize that in the total debt movement of some ZAR 12.7 billion up from ZAR 9.8 billion, nearly ZAR 800 million of that was just the weakening effect of the currency. The underlying debt effectively, and that's at total debt, including overdrafts, the overdrafts being the bigger element. The pure total borrowings, or rather term debt in this period, showed very little movement. Then the table below that, just setting out what we would have calculated in getting to our reported pre-IFRS EBITDA. Yes, we did breach the covenant of 2.75. Yes, in discussions with all of the banks involved, they were supportive of issuing the necessary waivers.
Just to also make the note that on all of the other covenant measures that the group has in place, including interest covers, we are well compliant, and that is not a concern at all. Then just the last comment, and again, probably to some of you, it would be evident that we are perhaps overemphasizing the point, but just really to continue to make the point that our borrowings of some ZAR 8.5 billion, yes, they have increased. We've set out on the slide just the extent of the deterioration or the weakening of the currency. But in local currency terms, and it just is needed to be made, in Ireland, they have some EUR 190 million of debt. Their structured repayment on that is some EUR 5.8 million per annum.
The intention has always been that the Irish debt is part of the capital structure of that business, and at the end of the term, which is December of 2026, that will be rolled over into a new facility and renegotiated. The intention in Europe, and sorry, just to make a similar point in Switzerland, exactly the same, CHF 166 million of debt with an annualized repayment of some CHF 8 million. The intention not being to pay down the debt over a fixed period, but reach a bullet payment at maturity and again to roll over under a refinance.
I think again, just to make the point of why the European bankers understand and appreciate that that is the structuring of the debt, the repayment of both interest and capital continues to be honored by the local businesses, and the local bankers do not have very real concerns around the quality of that debt or the management's ability to service it. The next component, and again, just to touch on it at the bottom, and this is the focus of the business and particularly the finance team in the business in the immediate short term, because the biggest element which has caused distress on the covenant is the lack of net liquidity, in fact, the increase in the overdrafts.
And in the South African context, that is probably the biggest contributor of that movement from roughly ZAR 1.4 billion overdraft at September of, sorry, ZAR 1.7 billion at September of 2022, deteriorating to some ZAR 3.5 billion. And I think we just need to understand the impact that the SAP implementation at KZN disrupted the business. Some ZAR 900 million worth of working capital was influenced by the loss of turnover, the increase of stock holding as we went into that implementation, and obviously having to support the KZN retailers during this period. In addition to that, Mike also alluded to the fact that the group built up safety stocks in advance of the Easter trading period by some ZAR 300 million. And we continue in this investment or overdraft to also support the Polish business.
There have been some funds which we've had to continue or we've had to provide to Poland to assist with their working capital. But fundamentally, this is the area of focus. We do not believe at this stage it is either necessary or appropriate to renegotiate any of the European banking relationships, particularly in Ireland and Switzerland. We obviously are in more regular talks with our Polish bankers because of the nature of operations, but we believe that these businesses are well capable of servicing at extremely competitive interest rates, sorry, the debt in those countries. I would also just like to make a point that if you just look at the Irish debt of some EUR 199 million, some EUR 104 million of that actually relates to the buyout of the minorities, which took place in 2020 and 2021.
So the core Irish business has less than EUR 100 million of borrowings relating to operations. We structured the buyout of the minorities in country, which obviously gave us the benefit of the costing, but also avoided having to bring that debt back to South Africa and deal with it on the South African business. And both in Switzerland and Ireland, we have managed the buyouts of those minorities in that way, included in the Swiss number of CHF 166 million, is some CHF 56 million relating to the buyout of the Swiss minorities, also taking place in roughly 2021. So at this point, I'd just like to really wrap up the conversation on debts and debt covenants. The slide that follows, just for reference, there was concern around some of the exact ratios in place.
Just to highlight at a group level, and as I've described it as almost the umbrella covenant, those are the measures that we have in place. We have ironically both a pre and a post-IFRS number, so it's a real belts and braces approach on leverage. Then on the right-hand side, you can see what the in-country actual covenants are. As I've stated at the outset, in both countries, very well operationally performing against the covenants. In Switzerland, we have engaged with the banks on the ratio that they've achieved because of their low profit in this period. But again, they were comfortable, and that number should reverse. I hope at this stage, I've been able to give you some sense of where the business stands on the issue of debt.
Yes, we are aware that at circa ZAR 8 billion worth of term debt, it is a significant number, but against the backdrop of operating profits on an annualized basis of some ZAR 3.5 million-ZAR 3.8 million at roughly two times, we are not concerned about it, but we do acknowledge that it needs to be managed, and if the opportunities in the future exist to start reducing that, that would obviously be a priority and something that we would want to deal with. In the more immediate short term, our focus is on short-term debt or more colloquially referred to as overdraft debt. That is what the business needs to manage its short-term cash flows and short-term working requirements or funding requirements.
But just wrapping up on cash flow, we've set out for you on the slide that follows just the cash flow performance of the business over the last period. And again, just very, very obviously illustrating that the working capital changes and net working capital outflow of some ZAR 1.9 billion. We touch on the right-hand side just giving some color without going into all of that detail. Again, we spoke to the KZN impact. We spoke to, as a consequence, increasing trade receivables, but increasing trade receivables in the greater business as we are supporting retailers in these difficult and challenging times, and then a decrease in trade payables because of the disruption in that business as a result of turnover losses. Taxation and dividends highlighted further down. And then capital expenditure included in that number, circa 292 of the ZAR 1.1 billion relates to SAP projects.
Small business acquisitions of just under ZAR 200 million. And then just from a disclosure point of view, the principal element of the IFRS 16 leases, both receipts and payments, and fundamentally finishing at a net cash movement of some ZAR 1.9 billion. And it is not, perhaps the point being those of you that might have noted that that ZAR 1.9 billion is almost exactly the working capital change in the period. And again, highlighting why the focus on the business has to be its working capital in the short term because the cash that is being generated is more than adequate to cover any other opportunities, be they acquisition or capital expenditure.
But at the same time, I can reassure you that the business has taken a hard view and will be taking a very close look at any capital expenditure in the short term and to the extent that that can either be delayed or deferred. That has also been agreed and instructed. The slide that follows, and again, just to illustrate in a more graphic form what you've just seen, and I'm not going to spend that much more time unpacking it, but I think what is clearly obvious is that the inflows of operating profit were not sufficient to cover particularly the working capital requirements, and that will remain the focus of the business at this time. Just to touch on capital expenditure, we've provided you some detail, firstly at a high level between expansionary CapEx and then just more regular maintenance CapEx.
And then also included in the slide is just the acquisition of businesses and subsidiaries. On the right-hand side, just giving you a breakdown of what those were, some retail stores in both South Africa and in the United Kingdom. We bought in Ireland a wholesale business, McCarrick Brothers, which is a very, very good deal for us, a deal that the Irish team are very positive about. And then what Tondo Rosa, in fact, relates to properties and four retail stores in Dublin. And then the rather unusually named business, SMC Food Concepts, in fact, is a meat company that has been acquired by Encore as part of our very committed view on improving our private label product and some reverse or vertical engineering, which in fact is taking place in that space. And we're quite excited about that opportunity.
Just to turn the slide again, just to make the point and just to give you further color of the capital expenditure by geography to get a sense of, in fact, what we are spending. Just to make the point that within the South African business, some of that expansionary CapEx of ZAR 289 million includes, from a cash flow point of view, some ZAR 150 million worth of SAP spend. That has brought the total SAP spend since the project initiated to some ZAR 800 million. Before I wrap up, I just want to also on the issue of CapEx just provide the guidance. Our budget CapEx for financial year 2023 was circa ZAR 2.5 billion. At half year, roughly ZAR 1.1 billion has in fact been spent and/or incurred.
I can assure you that the spend over the second half of the year is not going to be ZAR 1.4 billion, and we believe that we will be probably not anything more than circa ZAR 1.8 billion-ZAR 1.9 billion for the full year as we look to pull back very carefully. We do not want to impact some of the more strategic projects that we have initiated, but we do obviously need to ensure that we are very prudent at this time on any capital spends and allocations.
So that, if I just turn to the last slide in wrapping up, it's been a long presentation, but there's a lot of detail, particularly around the balance sheet and debt turnover growing by 7.9, a very disappointing operating profit performance at a group level, contracting by some 17.5%, and a very disappointing and the management take it extremely seriously that profit after tax, in fact, has contracted by as much as 30%. I can assure you something that I'm of something, and that is that our management teams are working extremely focused on ensuring that is reversed, not just in the immediate short term, but to set up the business for a more longer-term sustainable performance at that level.
And before I hand back to our Executive Chairman, can I just make one last thank you to our finance teams around the group in Ireland, to Aiden, to Paul, to Jen, to Joe, in Switzerland, to Reto, in Poland, to Jakub, to Patrick, and all of your colleagues, and more in our South African team across our six geographies, our six regions. And then most significant to me in the preparation of this to our head office team, it's a very, very small team that holds all of this together in the last six weeks have been put under extreme stress. So to Mags, to Abby, to Chiara, and all of the team, my thanks and appreciation for all of the effort that's gone in to ensure that we've been able to present today a comprehensive disclosure on the performance of this business.
On that note, I'd like to thank you all, and I'm going to return to our Executive Chair. Thank you, Mike.
Thanks, Mark. And also just on behalf of the board, a big thank you to you personally for the huge amount of work that you've put in with your teams over the past period. I'd just like to move on to our outlook very briefly now and to say that in the Southern African environment, we've seen a significant uptick in sales post the period end, which is very encouraging for us, and the team will push ahead with the accelerated growth plan, as I've discussed earlier.
Operational and capital expenditure disciplines and improved working capital management are critical focus areas for management, as Marks mentioned, and I also have, and resolving the outstanding SAP issues is a priority for the business and for our retailers, and I believe we're getting there. In Europe, the summer months are traditionally very positive months for retail trading in the hospitality sector. In Ireland and Southwest England, the teams will build on the momentum seen in the first half, reaffirming their position as leader in the convenience sector. Execution of the new EuroSPAR strategy will continue in the months ahead. In Switzerland, we remain focused on new business development, predominantly in the petro convenience area, and strict cost disciplines to improve profitability in this region will be key to success in the second half.
In Poland, management will focus on a couple of key areas, mainly gross margin improvement and retailer loyalty growth. And the board, as I've said, will make a decision in respect to the options it's currently considering. And in terms of the outlook, while there are numerous challenges, we're incredibly positive about the SPAR business. So in closing, I just want to say that we hosted the SPAR International Congress in South Africa a few weeks ago, at which the concepts of collective resilience and moving forward together were the themes around which many discussions were based. And in the exceptionally difficult circumstances and situations that most South Africans and most South African businesses find themselves in at the moment, perhaps it's worthwhile reminding ourselves that we as a country have always demonstrated collective resilience.
We've also always managed to tackle what appears to be insurmountable problems in our country, and we've always been able to solve them at many times in our history. And however, saying that, I believe that we're at a crossroads now. And in South Africa, it's critically important for business and government to work alongside each other, now more than ever, putting aside any mutual distrust. It's time for all of us to move forward together. We're not a nation of losers, and it's often said if you've got the right people and the right tools, you can build or fix anything. And I'm very positive about South Africa, and I'm very positive about the SPAR Group. And I think there's work to be done, and it will lead to much better success.
And I think I'll stop there, and Mark and I will now take any questions that you may have.
Good morning, everyone. First question. What are the options you are considering in Poland? Can you close or sell the business, and what will that be exactly in terms of cost?
Okay, I'll take that question. Thanks, Kieran. The options, there are three options, but only two I think are being considered. The three options are that you could sell the business, you could continue as you are, or you could expand rapidly and really build a big business. I think the idea of staying as we are and sort of eking towards a break-even situation is not something that we find very appealing, so I think the remaining options are one, to exit Poland by selling the business, and two, the other option would be to expand rapidly.
Obviously, if we're going to expand rapidly, that might require acquisitions, which in turn may require increased debt. And I don't think that's something that we would find entirely palatable without showing that elsewhere in the debt structures, we were able to reduce debt, or alternatively, that we might find partners in the local communities and in the local countries to support our endeavors. So those are the options for Poland. And I think there was a second part to that question, Kieran?
No, that's it. Okay, thank you.
Okay, next question. What are the cost-cutting initiatives of Switzerland? What does this look like for operating margins going forward?
So as commented when we did speak about Switzerland, the Swiss operating margin at the moment of circa 1% was very much in line with what we've guided previously, but not a number that we are comfortable with or satisfied with.
Under Rob Phillips' guidance and leadership, the Swiss have looked at their entire income statement, their entire cost structure. Some of that cost was the disposal of those corporate retail stores. But yes, you do lose the retail margin. More significantly, and in the short term, what the Swiss team have done has taken views on certain redundancy positions. We are not wholesale retrenching, but they have reduced a small number of heads, which will have a short-term impact, at least in the FY24 financial year that will come through. And in fact, I've got to also make the point that the entire Swiss leadership team have taken salary cuts at this stage in an effort to ensure the sustainability of their business. Other than just people cost, the business will also relook its entire operating cost structure, including running cost, and reduce where they can.
Okay.
In terms of the covenant waiver, how long is it waived for?
So that has differed from banker to banker. Our projections at this stage suggest that at September of this year, which is the official reporting date to certain of the banks, we don't report to all of the banks every six months. But the projections and forecasts that we have from the business suggest that we will still be constrained at September this year unless there has been a dramatic turnaround in working capital. We have presented that to the Irish banks and to certain of the European bankers. They have already been very supportive of that. In fact, we've received their support from, sorry, to beyond September of 2023. But as a formality, we will approach all of the banks again in September and again request their support.
At this point in time, I think the short answer would be it has been waived for the breach at March 2023. We have received very positive support that should we need to apply for September 2023, there is a very strong, compelling underpin base case, and they are happy with that. But we would go through the actual motion again in September.
Mark, before Kieran asks the next question, perhaps you can just comment on an element of the previous question, which is what would the accounting effect be on exiting Poland or selling it?
Yeah. Thank you, Mike. Well, at this point in time, we have approximately EUR 110 million of debt in Poland. Obviously, that debt is fundamentally secured and supported by the South African parent.
And if there was an extreme decision taken to exit the country, you would obviously have certain break costs or certain exit costs, but you would at least be faced with, as a minimum, the settlement of any debt in that country, which right now would be circa EUR 110 million or roughly EUR 2 billion.
Right. So that would be offset by any possible sales proceeds. That would be the cash impact. And I think from an accounting point of view, there would be probably very little impact because of the consolidations that have been taking place. Correct. All right. Thanks, Kieran. Just to clear that up, we did miss that part.
Yeah. I'm sorry. Apologies. Sorry, coming back to the covenants, are you able to comment on any conditions that have been placed in the group? For example, no dividends, having to reduce CapEx.
The waivers that we've received from all of the bankers across all of the geographies have included no conditions at all. The only additional penalty margin was added by one of the banks of roughly 1.2%, and that will remain in place until the covenants are reinstated.
Next question. Should Poland not be sold and you breach covenants at year-end, what is the risk of a rights issue?
At this stage, the possibility of a rights issue is remote. It's not something that the board is considering. We have many other options before we could get to a situation like that, including, for example, a close look at how we fund our retailers, because SPAR fundamentally has done a huge amount of work in this area. SPAR isn't a bank. And the other area that we could look at is, of course, in the value of our properties.
We hold a huge number of properties. And of course, there'd be options for sale and lease backs in this environment. But at this stage, we're not feeling any pressure to move in any of those directions just yet.
Next question. How much loyalty and service levels have fallen in South Africa due to the SAP issues, and how will this be fixed?
So if we consider service levels as the percentage of the delivery that we're able to make to retailers from our distribution center, then the number post the go-live in February was exceptionally low, some 20%. But that, as recently as last week, has reached a number of just over 70% and continues to increase quite substantially week on week as the system is bedded down, and a lot of the issues in the system are smoothed out.
The plan is to get that to 85% by the end of this month. And at 85%, the KZN distribution center will start taking back the delivery service to certain of the peripheral KZN stores that at the moment are being serviced by the Eastern Cape and by South and the North End, which will then allow the business to normalize its distribution to those retailers in KwaZulu-Natal. So the percentage at the moment is roughly 70%, but on track for 85% by the end of the month. And as far as stock levels are concerned, yes, we obviously built up safety stock in the DC. I think part of the frustration of the system at the moment is not being clearly able to buy efficiently because of the amount of noise that is taking place in the system.
So we might have a lot of the wrong or overstock in certain areas and insufficient stock or out of stock in others. And that's part of getting the delivery level up to 85% as we identify and bring in the stock that we are out of at the moment.
Kieran, before we go to the next question, I just want to make a comment on the debt covenant breaches. I think it's important for people to understand that almost all of the extent of the debt covenant breach is caused by foreign exchange currency movement. Mark, you maybe just want to comment on that. I think it's important for people to understand that this has played a huge part in the numbers, the mathematics that we do in the business, and doesn't represent any significant change in the business.
Yeah, maybe I could just hand that over to you. The other important thing which we really want everybody to understand clearly is that we hold mostly overseas debt. This debt is cheap, and this debt is serviced and repaid according to the plans in Switzerland and Ireland. To the extent that one can earn 20% returns on investments or on projects in Ireland, for example, and you're paying 4% interest, I think it goes without saying that you're paying down debt, or alternatively, bringing the debt on shore makes no sense whatsoever.
Mike, just in response to that, yes, I've always cautious in discussions with bankers and bank covenants, particularly at a parental level, to blame everything on FX. The reality is that the deterioration in, or rather the weakening of the currency over the short last 12 months has had a significant impact.
Would we have been able to avoid a breach? No, we wouldn't have. We would have been a lot closer to 2.75, and hence, the focus in the presentation on identifying that working capital also contributed to the breach, but would we have been at circa 3% or approximately 3% had it not been for the currency movement? Most definitely.
Okay. Next question. How much support did you extend to your retailers in South Africa in the first half due to load-shedding in terms of loans, working capital? Will this continue? Have any retailers gone bust?
I think it's going to be difficult to put an absolute number on it because the type of support that we would be providing to retailers would be in a wide range of categories. It's not just a one-size-fits-all.
In some instances, the work that's been done in our marketing teams providing increased marketing support, promotional advertising, subsidy on product, driving special promotions for stores to try and assist their retail turnover. In other instances, we provided some form of subsidization on fees, be it leases or rentals, and the most critical one, obviously, to us right now is the short-term support on trade debt and extending credit to those retailers, so it's not an absolute number. It's a wide range of support, all of which impacted our results.
Thank you, Mark. Please could you provide an updated timeline for SEP implementation on a regional basis and the subsequent update of CapEx timing?
Yes. I think we're planning to finish off a proper independent post-implementation review of what's been happening in KZN in the next couple of months.
And from there, there's going to be a full-blown evaluation of all the learnings before we start moving to a rollout SEP in the Western Cape and Eastern Cape. We want to learn from all of the mistakes that have been made.
Please can you clarify the timeframe for a decision on Poland? Is it the end of the calendar or the financial year?
Financial year. We are under pressure. We've put ourselves under pressure to make this call. And as I mentioned earlier, we've commissioned some very, very detailed research into the market and its players. And as I reported, we received that last week. And we studied it at yesterday's board meeting. In fact, we had a board meeting on Friday to talk specifically about Poland. We had the weekend to go through it. And then we discussed it again yesterday. It's receiving urgent attention at the board.
Next question. Has the board considered exiting Switzerland? The business seems ex-growth and generates poor revenue and profits relative to its asset base. If not selling it, what is the rationale for keeping it?
Look, I think at this stage, it's important for us to study what's happening in every geography, and I think it's a question of priorities. At this stage, we're very focused on Poland and what's happening there. I mean, the Swiss market has difficulties, as I've mentioned, with the recent cross-border trading. There's no doubt that convenience shopping in Switzerland is very much on the up. The other thing that's interesting in Switzerland is there's some very strict rules coming down the road in a couple of years' time with regard to petrol and forecourts, and so it's quite possible that forecourts could be used extensively for retail outlets.
So that's a bit of thinking that we are doing and working with Avia at this stage on.
Okay. Next question. The dividend cut for the interim period, how long should one expect the cut to be implemented for?
I think that's obviously something we've discussed. And we're not in a position to say we're going to cut it for this year or for two years or three years. We obviously thought about that. I think it would be irresponsible for us to make a call like that. I think the most important thing is for us now to do what we've got to do for the next few months, and then we'll reevaluate it towards the end of the financial year, which of course is September, right?
In terms of the SAP implementation issues, is there any recourse for damages?
At this stage, no.
As I've mentioned, we've been quite fortunate that we were able to help many retailers out of our Eastern Cape, South End, and North End DCs. But having said that, we're very well aware of the fact that some retailers have been hurt by this.
Is the Giannacopoulos lawsuit being resolved?
Yes, it is being resolved along two channels. We're resolving it along a formal channel where we've agreed to arbitration, and we're also following an informal route where several of our executives in KZN and I are involved directly with the family, and we've met, and we've had many discussions, and as I think I mentioned, we've distilled all of the issues that concern the family to about 10. And in principle, we've resolved about six or seven of them, and there are three big ones that we still need to tackle.
But I'm confident that if we stay committed to the process, we can get through this failing, which it will go to arbitration.
Thank you, Mark. Is it reasonable to assume that the differential between wholesale sales growth and retail sales growth in South Africa is indicative of franchisees buying away from SPAR?
Yes.
Okay. On load-shedding, having incurred ZAR 700 million in cost during the interim period, what is the estimated cost for the second half of the year for your retailers?
Well, I think that the problem we've got is that load-shedding isn't consistent on any day or during any one week in any part of the country. So it's difficult for us to make projections.
But I suppose on a linear basis, if load-shedding was to continue on the levels that we've seen for the last six months, the number would have to be ZAR 1.4 billion. And if in fact we went to load-shedding stage eight, it would be significantly higher.
Is HMR home meal replacement benefiting from enhanced takeaway demand from consumers due to load-shedding and not cooking at home so much?
Probably.
I see PPE expanded this year. What type of PPE CapEx did you expand into? Secondly, what do you plan to do with the Swiss and Polish businesses, which we've covered? Do you plan to keep these? Okay, we've covered that. Apologies.
Another also the question was regarding just about the PPE, if you could just repeat that portion.
What type of CapEx did you expand into? What sort of? PPE CapEx, apologies. Right. Okay.
So the total spending in the period was just over ZAR 700 million. ZAR 272 million of that was intangible assets relating to SAP. And then the remaining ZAR 473 million was basically trucking trailers and growth expansion requirements.
In terms of your GO24 stores in Switzerland, are these similar to Amazon Fresh and Tesco GetGo stores, or is this something different?
The software and the management of the store is different. Basically, one just accesses it. I think that there are elements which are the same, but fundamentally, what you do is you access the store using your phone, and you move around the store, and then you exit.
Back to South Africa, what is the prospect for cost growth in the next 6-12 months?
Prospects for cost growth, I think this will depend on diesel prices. A lot of this will depend on electricity availability.
A lot of this will depend on other cost pressures that are pushed in our direction. As I've mentioned before, we are used to managing risk and return in business. In the last few years, I think this whole element of uncertainty has been introduced into business, which makes it very difficult for us to predict some of the exogenous factors and how they'll impact on the business.
What drove the decline in other income in South Africa during the six months?
Sorry, just say that again.
What drove the decline in other income in South Africa?
What drove the decline in income? Mark?
Very, very simple. In fact, other income in the SA business was fundamentally the fact that in the previous reporting period, we had some ZAR 33 million worth of loss of profits insurance claim being the overhang of the disruption that took place in KZN in 2021. And obviously, that has no longer repeated. So it's really the insurance proceeds that were paid out in the prior period.
Okay. Just in respect of SPAR again, the chain were impacted by ZAR 786 million. With South Africa's gross margin of circa 10%, how does SPAR impact results in an operating profit impact of ZAR 143 million?
Correct. The calculation of numbers is not far different. I think what we've also done in getting to the 143 is we've actually used gross margin of circa 9.3. And then on top of that, there was obviously additional OpEx incurred.
So 786 times 9.3 plus additional OpEx of roughly ZAR 70 million is your ZAR 143 million guidance.
Okay. Can you please explain how people living in Switzerland can buy groceries at 50%-60% cheaper across the border?
Yeah. It's a crazy situation. There are different cost structures in Switzerland and also very different tax structures and VAT and sales tax. And so what we're finding is that people, when they want to do shopping for a week or two or for a month, they'll get in their cars and drive over the border and shop in Germany or Austria where the prices are significantly lower. Of course, this does not affect convenience shopping, hence our focus on that sector. And it's a fact. I mean, as we've seen, almost anywhere in Switzerland is within an hour and a half of the border, whether it's Italy, France, Germany, or Austria.
People do this. It's just the way that the Swiss economy is structured.
Okay. Next question. What GP margin assumptions are applied to Switzerland's EBIT margin guidance of 1.5%-2%?
It's not so much a guidance. It's what the Swiss are currently achieving. So basically, using a number of 17.5, we believe that number could be as strong as 18. And at that 18 level, we should be between 1.5% and 2%.
Mark, can you talk to OpEx cost growth expectations across the geographies for the second half?
I think, to be honest with you, Mike's already dealt with South Africa.
And I think to repeat the whole shopping list of concerns that might impact the South African business, other than to say that in the SA business, the South African CEO and the management team have been given a clear number that we expect them to save. And the fundamental objective in the entire exercise is not to target a %, but to target positive leverage.
Yes, I think that's completely right. I mean, we simply can't have a situation where your sales are growing at X% and your costs are going at 2X%. So there's going to be a very steep cost reduction exercise carried out.
Okay. When can we expect an update on our new CEO?
I'd hope that in the next month or so.
We will continue with updates every two weeks if we need to, but we really need to fill this position urgently now. But as I said, we're not prepared to be rushed into it. So we don't have the good fortune, I think, of having to make a change again in the foreseeable future.
Okay. Does the group utilize hedges?
For what? I mean, you obviously can hedge operational costs, and you can hedge balance sheets. We do not hedge the balance sheet, but we do definitely hedge some of the operational expenditure.
Okay. Are you reviewing the current funding structure where the group uses less overdraft facilities going forward?
Yes. So I think that's Mark's touched on. We're definitely doing that.
I mean, what we have done because we've been in a position to do it is in recent times, we've been able to make acquisitions out of short-term funding. And then there's a chance now, obviously, to convert that to term debt, which would be more appropriate to the length of the project that we've invested in. And I think the number there, Mark, is probably ZAR 2 billion odd. Correct. Yeah.
Okay. What was the quantum of the forex gain in Poland?
Circa ZAR 10 million.
Okay. Interest rates in Switzerland have ticked up significantly off a low base. Given the low profit margins and elevated levels of debt in the Swiss business, will the Swiss segment be cash flow positive with higher finance costs going forward?
Obviously, the challenge is higher finance charges going forward for how long?
I mean, obviously, the Swiss business at the moment has got significant debt. A lot of that is mortgage debt. And as I've alluded to, some CHF 56 million is the minority buyout debt. So the challenge for the Swiss business is to get their operating margin back to a level of plus 1.5. And then we're going to have to manage the debt. I mean, sorry, manage the finance cost. At the moment, the finance cost in Switzerland is circa 50% of the operating margin at 1.5%. So yes, cash flow-wise, they can service their debt.
I've mentioned this clearly. We are looking at this because we're not a bank, and we're not a property-owning company. We're a retailer, wholesaler.
What CapEx are you not spending on that you had originally planned for?
At this stage, I think the most obvious one is the fact that in the current period, there was a certain cadence on the rollout of the SAP project that has been pushed out. So it's not so much the CapEx has been cut. It's been delayed. So as already guided, the budget for this year was circa ZAR 2.5 billion, of which a substantial portion of that was actually SAP-related CapEx, some ZAR 900 million. In the current year, if the spend is going to be ZAR 500 million, well, then we will defer ZAR 400 million.
Can you speak about the health of your franchisees? How many stores are making losses or experiencing difficulties?
I can't give the correct or accurate answer on that, but I can tell you that I've engaged with many franchisees across the different stores. I've met many Build It franchisees. I've met many SPAR franchisees.
By the way, they're not franchisees; they're independent wholesalers, retailers. It's completely different. These independent retailers, many of them are incredibly smart and very entrepreneurial. They're running these businesses for themselves and their families. I think many of them are doing well. There's no doubt that particularly the independent retailers that are owning fewer stores or perhaps one store and aren't hardened retailers, that they will be taking some pain, particularly with the cost of running generators and the other side of the equation, the restrained consumer spending environment.
Thank you, Mike. Can you comment on what would happen if the financiers don't waive the covenants?
They have waived the covenants. I think, as Mark's mentioned, unconditionally with any adjustment being a 1.2 interest rate hike with one bank.
If the rand stays as weak as it is now for the next six months, what are the effects on profitability?
Again, it really depends which way it moves. I think in the South African business, which is our mothership, I think that it would be unaffected by that.
Okay. And then what is the status of your online delivery service, including how many SPARs have the online offering?
So I think I mentioned we had five pilot stores last year. We've got 234 now, planning to have 400 by our financial year. And then we're also looking at leapfrog techniques to accelerate this.
Okay. That's it for today.
Oh, wow. Well, I think that then brings us to the end of our presentation, Mark. I don't think there's anything else that you want to add.
But if not,
I was just going to take the opportunity, Executive Chair, to say that in the very short space of time that you've been part of this organization, your knowledge of SPAR is not just impressive, but it's actually becoming quite extensive. So it's been a pleasure. But no, I think it's been a good morning. I hope that those of you that have joined us at least have taken comfort in a lot of the uncertainty that has existed in the market over the last couple of weeks. There's been a lot of questions asked, a lot of concerns raised. And we hope that what we've been able to share with you today addresses a lot of those concerns and gives you the assurance that this is a solid business. It is going through some challenges at the moment, but it will be back. Yep.
I think it's been a very interesting couple of weeks for us because since putting out our trading update and our profit warning, obviously, we've been unable to speak about anything. So we've felt a bit like we've been in the boxing ring with our hands tied behind the back. But I'm glad we've had a chance to talk this morning. I just want to say thank you very much for making the time for us. And please contact us if you have any other questions. I know some of us will be having discussions anyway. And most importantly, I just want to say thanks on behalf of all of us for your interest in this SPAR Group. Enjoy the rest of your day.